China is walking into a real financial crisis. A major part of Chinese financial architecture, the shadow banks, are facing serious liquidity problems and they have not paid their investors the amounts of returns they promised. This has raised doubts over their future.
Three real estate companies, which placed their funds with Zhongrong Trust, the Chinese shadow bank which manages over $87 billion investments on behalf of its clients, have complained to the stock exchanges about Zhongrong not paying their promised returns. In turn, this will affect their own liquidity and funds position.
Many of the major property firms have their funds locked up in these shadow banking companies for earning higher returns. As it is, the Chinese real estate sector is under siege as sales have plummeted and their projects have come unstuck with many of the largest companies saddled with unsold housing units.
On top, any liquidity freeze coming from such illiquid investments could spell disaster for them as well as their home and property buyers. The freeze could spread and spark off a full scale crisis, some experts fear.
Zhongrong, one of the largest of these shadow banks, not paying its promised returns and defaulting, and this has spread worries about contagion in the entire financial sector. In the context of the importance of the company involved, experts are wondering if China is facing its so-called “Lehman moment”.
It may be recalled that Lehman Brothers, one of the largest investment banks in the USA, had faced payments difficulties during the start of the global financial melt-down in 2008. Without support, the 150 year old company, a bastion of US banking industry, had collapsed.
In a way, the crash of Lehman was instrumental in setting off a crisis of confidence which spread throughout US financial sector and erupted into the financial meltdown of that year. Lehman collapse has since remained the milestone in the history of capitalism and financial crises.
China’s shadow banks are really like India’s non-banking financial companies in much larger shape. They manage assets and investments for corporates as well as wealthy individuals. Even some retail investors have put their savings into these asset management companies.
These shadow banks could attract funds for their clientele’s management by promising to pay high returns. Zhongrong is not only one the largest such operators, but it is part of a much bigger conglomerate which operates in mining, manufacturing and other businesses. For such a large entity to face funds crunch and unable to meet its promises mean the crisis is worse than just ankle deep.
Worse, Zhongrong has refused to clarify its position either and angry investors are protesting in front of their headquarters in Beijing. Investors have gone into social media accounts and have raised a veritable storm of protest and enquiries about Zhongrong investment management.
These shadow banks, or non-banking financial companies, have tentacles spread across the economy. In case, these companies face a liquidity crunch and refuses to honour their commitments, these would affect the overall economy as well. Their freeze would directly affect consumer behaviour as the investors would become risk averse and domestic consumption would be affected.
The latest Zhongrong episode has come in the wake of troubles with another very big Chinese home building company, Country Garden, which is facing severe problems over its survival. The Hong Keg stock exchange authorities are removing the company stock to contain any possible contagion over its illiquidity.
Coming one after another, the confidence in the financial markets have been shaken and global investors are moving to ring fence their massive stakes in the country. There is as yet not much scared withdrawal, but if things do not improve these kind of nervous reactions might set in. The Chinese Yuan is also under stress and losing against the US dollar.
These kind of developments go against the very grain of China overall economic policy now. Xi Jinping is seeking to boost domestic Chinese consumption for giving a stimulus to the sagging economic fortunes. Chinese economy has disappointed and growth has stalled.
While previously the authorities could pump in more funds and encourage in fracture and housing construction, the scope has become limited. Already, the economy is saddled with unsold hosing stocks and scarcely utilised humongous infract facilities. Further encouragement of such investments could become a drag.
The Chinese supreme leader, Xi Jinping, is not helping matters stabilise. Xi is throwing in an increasingly combative stance upsetting the sensitivity of foreigners. In response to the trilateral meeting of US President, Joe Biden, in his country retreat, Camp David, Xi stepped up Chinese military movements around Taiwan.
The Chinese Navy ships are circling around the island on its own. The airforce is flying ever closer to Taiwan air space and even distant islands in South China Sea is witnessing active Chinese military moves. The geo-politics combined with sheer ground level problems are combining to make Chinese financial crisis more serious. (IPA Service)
By Anjan Roy
